Cambrex Gets down to Fighting Weight

When Cambrex completed the sale of Rutherford Chemicals to Arsenal Capital Partners for $65 million late last year, Cambrex went from being a fine chemicals company with a mix of pharmaceutical, nonpharmaceutical, and biotech products to a trimmer and more focused human life sciences firm. It also shed businesses that accounted for about 25% of sales. According to Chief Executive Officer James A. Mack, however, the sale of Rutherford puts Cambrex in a better position to achieve his goal of $1 billion in annual sales within five years.

The sale of Rutherford is to some extent the culmination of a restructuring started at Cambrex in 1998 with the formation of a pharmaceuticals unit. The company, which had operated as an amalgam of acquired fine and specialty chemicals firms, was seeking to achieve greater definition as a life sciences firm with a major focus on pharmaceuticals. At the same time, Cambrex began looking ahead to the coming wave of activity in biopharmaceuticals.

Soon after the Rutherford deal closed, Cambrex announced another organizational repositioning: the combination of its small-molecule active ingredients and biopharmaceutical businesses into a single group under the direction of Gary L. Mossman, former head of predominantly nonpharmaceutical contract manufacturer Dixie Chemical, who came to Cambrex last year.

Mack and Mossman plan to push Cambrex beyond its traditional base in fine chemicals into a field they call human health. Cambrex approaches the field with three divisions: small-molecule active pharmaceutical ingredients (APIs); bioproducts, including cells, media, and other products; and biopharmaceuticals, its contract process development and manufacturing business. The company is investing across the board but emphasizing high-growth niches such as cell therapy, where Cambrex hopes to achieve pioneer status.

Pioneering is not a new role for Cambrex. The firm, formed in 1981 by Cyril C. Baldwin Jr. and Arthur Mendolia, started with the idea that a company can be built through the opportunistic acquisition of businesses discarded by large conglomerates. Cambrex, which went public in 1987, grew in size but lacked the kind of cohesion among its businesses needed to generate high revenues.

Mack, hired from Olin Corp. in 1990 to correct this problem, added a strategic dimension to the firm's acquisition regime. Industry observers credit him with blazing a trail into fine and pharmaceutical chemicals--the latter with the acquisition of Akzo Nobel's pharmaceutical chemical unit in 1994--ahead of the fine chemicals bandwagon of the late 1990s.

More recently, Cambrex staked out biopharmaceuticals with the acquisition of BioWhittaker in Walkersville, Md., in 1997. The firm followed up by acquiring Bio Science Contract Production (now Cambrex Bio Science) in Baltimore and Marathon Biopharmaceuticals in Hopkinton, Mass., in 2001.

According to Allen Cohen and Tracy Marshbanks, analysts at First Analysis, recent moves at Cambrex are part of a constant push into future growth markets. "They have demonstrated the ability to look out a few years and see a growth area and get there at the right time--not so early that you lose money trying to build it, and not so late that it's become expensive because everybody is there," Marshbanks says. "And they've done well. [Mack] is viewed by his peers as a visionary who can also execute."

Cohen adds that much of Mack's success hinges on his being "an astute buyer and usually an astute seller" of businesses. Mack himself acknowledges that he might have done well to have sold Rutherford Chemicals in 1998 or 1999, before specialty chemicals markets tanked. "He may have sold cheap with Rutherford," Cohen says, "but at that point it was small relative to the rest of the company, and it had a strategic thrust to it."

THE MOST RECENT changes at Cambrex follow a tempestuous year that started with the departure of Claes Glassell, chief operating officer and heir apparent to Mack. Industry sources familiar with the circumstances of Glassell's departure say he left when Mack decided not to retire early in the year, as he had planned. Mack subsequently agreed to stay on as CEO through 2004. Anne-Marie Hess, director of investor relations, says Mack, 66, has not committed to leaving at the end of the year, but that an active search for his replacement is under way.

As the year went on, Cambrex settled a 1998 class-action constraint-of-trade lawsuit involving its Italian subsidiary Profarmaco Milano. Cambrex cut its earnings forecast in April.

Cambrex also experienced a classic custom manufacturer's setback when Transkaryotic Therapies (TKT) failed to get U.S. approval for Replagel (agalsidase alfa), a drug it markets in Europe for treating Fabry disease. Cambrex had been supplying a key biologics component with expectations that TKT would ramp up to supply the U.S. market. TKT pulled production back in-house, resulting in a loss of about $17 million in business for Cambrex, according to Mack.

The result of the setbacks was a financial beating: Cambrex' stock dropped nearly 50% to approximately $15 per share last spring, and last month it reported a 2003 net loss of $47 million. Its stock had rebounded to $27.60 late in January.

The company is fighting hard to recoup from the TKT loss with new biopharmaceutical business, Mack says, but the environment has been tough. "We had a robust pipeline of opportunities [last year], but as that end of the industry continued to suffer from a lack of funding, a lot of the projects we had anticipated near term just got pushed off and pushed off," he says. "That's beginning to change, and part of that change is being driven by our new organizational alignment."

Mossman's main objective, Mack explains, is to close deals and shorten the selling cycle. "Our projections are that by late third or early fourth quarter, we'll be back to our 2002 run rate," Mack says.

Anticipating success, Cambrex has been adding capacity. Last June, the company opened a biopharmaceutical development lab and pilot plant in Baltimore, part of a $26 million plan to expand contract bioprocessing capability. Earlier in 2003, the firm completed validation of an $11.5 million expansion of small-molecule API plants in Karlskoga, Sweden, and Charles City, Iowa. Cambrex recently opened its Center of Technical Excellence for pharma and biotech in New Brunswick, N.J.

The company has also been expanding its offerings through partnerships. In September, it formed an alliance with Analytical Bio-Chemistry Laboratories in Columbia, Mo., through which it gained access to tools and services in the area of radiolabeled drug testing and ADMET (absorption, distribution, metabolism, excretion, and toxicity) studies. A month later, Cambrex announced an alliance with Dextra Laboratories, a U.K.-based specialist in sugar and carbohydrate chemistry, by which Cambrex gains access to new chiral molecules used in API manufacture.

Generally, Mack expects sales to ramp up in 2004, based on new investments and products, such as taste-masking for oral drugs and new biocatalysis technology. The company is also supplying the active ingredient in Namenda (memantine HCl), a drug for treating Alzheimer's disease developed by Merz and marketed by Forest Laboratories. Cambrex is forecasting double-digit growth overall, including 20 to 30% growth in biopharmaceuticals.

Even if it achieves 10% overall growth, however, Cambrex will need to keep its eyes open for more acquisitions, Mack says, noting that it is evaluating about a dozen candidates. But he is confident the company is on the right path. "The sale of Rutherford made us a smaller company in terms of revenue but gave us more focus on higher growth areas," Mack says. "A four- or five-year time horizon for reaching $1 billion in sales is a lot more realistic today than it was a couple of years ago."